Tuesday, January 09, 2007

Minimum wage vs EITC

The CBO today released a brief report comparing an increase in the minimum wage with an expansion in the Earned Income Tax Credit. The report shows that the EITC is far better targeted as an antipoverty policy.

Here is the summary:

On the basis of data from the March 2005 CPS, about 18 percent of the 12 million workers who were paid an hourly wage rate between the federal minimum wage of $5.15 and $7.24 were in families that had a total cash income below the federal poverty threshold in 2004. Had all of the workers in that wage range, instead, received $7.25 per hour, they would have gotten about $11 billion in additional wages in that year. About 15 percent of those additional wages ($1.6 billion) would have been received by workers in poor families.

As requested, CBO examined the potential effects of hypothetical expansions in the EITC that would have provided additional payments to workers in poor families similar to the amount of additional earnings poor workers would have received by increasing the minimum wage rate to $7.25 per hour. One option was to increase the subsidy rate for childless workers by 50 percent. Another option was to increase the subsidy rate for workers with three or more children by 25 percent. On the basis of data from the CPS, combining those options would have increased total EITC payments by roughly $2.4 billion in 2004, with workers in poor families receiving $1.4 billion of that total.

About Me

I am the Robert M. Beren Professor of Economics at Harvard University, where I teach introductory economics (ec 10). I use this blog to keep in touch with my current and former students. Teachers and students at other schools, as well as others interested in economic issues, are welcome to use this resource.